The Triumph of the Quiet Tycoon

Published: August 1, 2004

(Page 7 of 8)

It seems Putin's goal is not only to sideline Khodorkovsky but also to gain some control over Yukos itself. In late July, the government took steps aimed at confiscating the company's largest oil asset as payment for the huge tax bill. If successful, the confiscation would serve as a double warning to oligarchs -- not only do they risk arrest or exile for displeasing the Kremlin; they risk losing their entire fortunes. Even foreign investors, who have looked warmly on Putin's moves against the oligarchs, are growing worried about the president's long reach.

That is why it is the politically cautious billionaires who are doing quite well these days. Alekperov, like Putin and unlike Khodorkovsky, was a product of the Soviet nomenklatura, and he shows signs of vestigial Soviet behavior. When he travels abroad, I was told by one of his aides, he always meets Russian ambassadors in the countries he visits. Government contacts of this sort are useful for any executive from any country, but Alekperov goes further than most. The Russian government owns a 7.6 percent stake in Lukoil, although Alekperov says it is planning to sell those holdings. In a vivid sign of the tight relationship between company and state, when Alekperov visited one of Lukoil's gas stations in Manhattan last year, Putin was at his side, eating a Krispy Kreme donut.

Many financial analysts see Lukoil's global projects and ambitions as uneconomical, more likely to bring prestige to Lukoil -- and to Russia -- than to generate corporate profits. Alekperov, who says the international projects will be profitable, has a hard time imagining any relationship with the government other than a close one. ''It is impossible to divide the interest of a country and a company that works on its soil,'' he said. ''Our interests are the same. What's good for Russia is good for the company.''

The curious thing for Russia's billionaires in the post-Yeltsin era is that they must answer to two masters, not one. In addition to Putin, there is the market, and Alekperov has attracted the unwanted attentions of Russia's most aggressive shareholder activist, William Browder, an American-born capitalist with the intensity of a Bolshevik intellectual and a tendency to talk so fast that he doesn't speak so much as he verbally scrolls.

As a young banker, Browder found his way to Russia in the early 1990's and did so well for Salomon Brothers that he set up his own fund, Hermitage Capital Management, which now controls more than $1.5billion in assets; it is Russia's largest investment fund. Browder plays tennis at one of Moscow's best private clubs, dines at the finest restaurants and possesses a delightfully ironic decoration in his office -- an oil painting of Lenin at the Finland Station, his arm waving toward the future. The painting is a nod at Browder's unusual pedigree: his grandfather was Earl Browder, the head of the American Communist Party during the Stalinist era.

On a rainy April afternoon I visited Browder's office, which is in one of Moscow's newest luxury towers. Lenin stared from the wall as Browder led me through a report he was preparing for investors. Its draft title (later toned down) was ''Lukoil: Hollow Promises, Wasted Value,'' and at its core was the ungentle suggestion that last year Alekperov's company had more than $1 billion in ''forgone revenues'' -- a euphemism for money lost through corruption or ineptitude.

Browder has filed shareholder lawsuits against nearly a dozen Russian companies, including Gazprom, the natural-gas monopoly, and UES, the electricity monopoly; much of the time he loses, but he causes enough trouble to force shareholder-friendly changes. He has begun taking shots at Lukoil. He drew my attention to Page 15 of the report, which says Lukoil has 160 daughter companies and 600 affiliates -- a complex structure that creates a screen behind which managers, if so inclined, can siphon off revenues. ''The way they go about doing their business is very murky and untransparent,'' he observed.

Browder has crunched Lukoil's numbers and come up with figures that show the company's oil output has grown far more slowly than that of its major Russian competitors, that its production per well also lags behind the industry norm and that its net income, on a per-barrel basis, is nearly 50 percent less than that of Yukos. Lukoil officials contend, however, that the company's higher costs are due, in part, to their international projects, which they say are long-term investments. And the slow growth in production stems from a desire, Lukoil officials claim, to avoid depleting their reserves.

The upshot is that Lukoil's stock price has been less buoyant than it could be. Paradoxically, no one has suffered more from this than the man who is most likely the firm's largest individual shareholder, Alekperov. But this is where another oddity of the moment surfaces -- the headstrong impulses that bring trouble to billionaires in Putin's Russia also happen to be the impulses required to reshape a monolith like Lukoil. Two years ago, Alekperov began a restructuring and cost-cutting program, but many financial analysts dismiss it as ineffective. Alekperov, they say, is insufficiently aggressive in carrying it out; he doesn't have the go-for-broke instinct of Khodorkovsky.